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Will Weaker US Inflation Affect the S&P 500?

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US inflation

According to data provided by the Bureau of Labor Statistics, the U.S. Consumer Price Index (or inflation index) was -0.30% in March 2017, compared to 0.10% in February 2017. This inflation figure was below the market expectation of a 0.20% rise.

The fall in the inflation index is mainly due to the fall in the performance of the energy index (XLE) and the gasoline index. The energy index fell nearly 3.2%, and the gasoline index fell nearly 6.2% in the same month. However, the food index rose nearly 0.30% that month.

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Will it impact the S&P 500 index?

The inflation index showed the first fall in performance in the last 13 months. That index is an important indicator for the US economy (SPY) (QQQ). Improvement in the index shows that the economy is on a stronger path. The rise in the inflation index also shows that consumer participation in the economy is improving. The rise in consumer activity is a major backbone of the economy.

The S&P 500 index has risen nearly 4.0% YTD (year-to-date). Improvements in macroeconomic indicators and a business-friendly sentiment under the Trump administration has mainly driven its movement. Inflation is one of the major parameters of the Fed’s decision to raise interest rates. As the inflation index shows gradual improvement, the Fed’s gradual rate hike process will also continue. Rate hike are appropriate when the economy is getting stronger. If the economy is stronger, then the market might also be stronger.

However, the falling inflation index in March dragged down investor sentiment. If this trend continues, it may affect market performance.

In the next part of this series, we’ll look at US retail sales in March 2017.

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